Economics

With the current Reserve Bank of India (RBI) Governor, Raghuram Rajan’s tenure slated to end in September 2016, the race for the New RBI Governor has started. Rajan himself is looking forward for a Second term. In a recent interview, he hinted that by saying that he has enjoyed every moment of his job but there is “more to do”. He succeeded Duvvuri Subbarao by becoming the 23rd Governor of the central bank of India on 4 September 2013.

There is a voice in circles of Media that the BJP leadership doesn’t want Rajan to continue. And these voices have gained strength after BJP MP Subramanian Swamy’s open criticism for Rajan and his letter to sack him. While Finance Minister Arun Jaitley maintains that he is on good terms with the RBI Governor, there have been instances when Rajan has opposed the financial policies of the FM and Narendra Modi-led NDA government.

The RBI and Finance Ministry has remained at loggerheads after the RBI Governor questioned the new method for estimation of the GDP Growth Rate. This was reason as to why in the run-up to the setting up the Monetary Policy Committee (MPC) and the budget, there have been many reports that the North Block wanted to clip the Governor’s wings by taking away his veto power on rate setting. (However, when the composition of the MPC was finalized, everything was settled with the six-member MPC having equal representation from the government and RBI and the Governor retaining the veto.)

So, the big question looming ahead in Economic Environment of India is: Will Rajan get a Second term? If not, then who will succeed him? Here, I present the contenders for top job:

1. Raghuram Rajan

Currently working as RBI Governor, Dr. Rajan is an alumnus of IIT-Delhi, IIM-Ahmedabad and MIT Sloan School of Management. He then worked as a Professor of Finance at the University of Chicago Booth School of Business. Rajan then served as the Chief Economist of IMF (youngest to occupy position) and is known as a key commentator on financial issues globally. He is the man who predicted the global meltdown of 2008.

Achievements while working as an RBI Governor are:

Controlled Inflation. Brought down CPI (Consumer Price Index) inflation from 10% at the start of his term and will be around 5% by the time his term ends.

Brought new changes in Banking system. 2 new banks, 11 payment and 10 small banks were granted licenses. Relaxed the rules for investments in SMEs from abroad. This has led to a step further in aim of financial inclusion on the lines of Pradhan Mantri Jan Dhan Yojna.

Came down heavy on banks on the issue of NPAs (Non-performing Assets). Rajan has not only introduced new regulations for early recognition of stress, but also created a framework for taking over the management of these companies through special debt restructuring (SDR) mechanism or completely sell the assets to asset reconstruction companies (ARC). There are also measures like cleaning up the books by making accelerated provisions for stressed accounts by March 2017.

Rupee had fallen down to 68.85 as against dollar in August 2013. The fluctuations in the price used to be high. Rajan’s policies brought a stability to it.

Changed the formula to fix the base rate. This led to reduction in cost of bank loans.

Ensured action against wilful defaulters like Vijay Mallya.

2. Arvind Subramanian

Currently working as 5th Chief Economic Advisor to Government of India, Dr. Subramanian is a graduate of St Stephen’s College, Delhi, and did his MBA from the IIM-Ahmedabad. He obtained his M Phil and D Phil from the University of Oxford, UK. He is a development economist who worked as Assistant Director in the Research Department of the International Monetary Fund with Rajan. He served at the General Agreement on Tariffs and Trade (GATT) during the Uruguay Round of trade negotiations. He has taught at Harvard University’s Kennedy School of Government and at Johns Hopkins’ School for Advanced International Studies.

He is considered very close to FM Arun Jaitley who has been impressed with his ability to read and analyze results faster than Rajan. Many in Finance Ministry feel that while Rajan sometimes become rigid on his opinion and refuse to listen to anyone, Arvind takes a middle path and listens to all the sides. Infact, he has succeeded Rajan as Chief Economic Advisor.

Both Rajan and Subramanian has a common criticizer in Dr. Subramanian Swamy who opposes a Green Card holder to sit on this position.

3. Arundhati Bhattacharya

Currently working as 24th Chairperson of State bank of India (first women to hold this post), Mrs. Bhattacharya is an alumnus of Lady Brabourne College, Kolkata and Jadavpur University. In 2015, she was named the 30th most powerful woman in the world by Forbes. This is her first time being ranked on the list. Also, she was named the 4th most powerful women in Asia Pacific by Fortune.

Bhattacharya joined SBI in September 1977 as a Probationary Officer. She has held several positions during her 36-year career with the bank including working in foreign exchange, treasury, retail operations, human resources and investment banking. This included positions like Chief Executive of the bank’s merchant banking arm- State Bank of India Capital Markets; Chief General Manager in charge of new projects. She has also served at the bank’s New York office. She has been involved in the launch of several new businesses such as SBI General Insurance, SBI Custodial Services and the SBI Macquarie Infrastructure Fund.

She introduced a two-year sabbatical policy for women employees for child or elder care. Her hard stance against NPAs and expansion of banking services has received appreciation from PMO.

4. Shaktikant Das

Shaktikant Das is a renowned bureaucrat who takes care of the budget division of the Finance Ministry. An Indian Administrative Services (IAS) officer from Oddisha cadre, he serves as Joint Secretary (Budget) in Department of Economic Affairs, Ministry of Finance, Government of India. He earlier held the assignment of Secretary, Department of Revenue in the same ministry. Mr. Das holds Master’s degree from St. Stephen’s College, Delhi.

His vital role in formulation of Union Budget has earned him appreciation from the FM Arun Jaitley himself.

5. U K Sinha

Upendra Kumar Sinha, a Bihar-cadre Indian Administrative Services (IAS) officer, has been the second-longest serving chief in SEBI after he got an extension as SEBI chairman earlier this year. In 2011, Sinha took over as Chairman of Securities and Exchange Board of India (SEBI), the regulator for the securities market in India, with a three-year term. He was given a two-year extension, which is supposed to end in February 17. He was the Chairman and Managing Director (CMD) of the Unit Trust of India Asset Management Company (UTIAMC), commonly referred to as UTI Mutual Fund.

As a SEBI Chairman, he has brought changes in Insider Trading and rules regarding Mutual Fund. he reduced the time for listing of an IPO. His action against defaulters like Subroto Sahara of Sahara Group are the points which make him a part of this race.

6. Urjit Patel

Urjit Patel is an eminent economist, consultant and banker, currently serving as Deputy Governor of the Reserve Bank of India. He was also Advisor of the Boston Consulting Group. Dr. Patel obtained his BA from the London School of Economics, M. Phil. degree from Oxford University and his doctorate in Economics from Yale University. He was at IMF India desk during the 1991-1994 transition period and was posted to IMF country mission in India 1992-1995. He has also been a non-resident Senior Fellow at the Brookings Institution since 2009.

When the UPA Government in India came into power for a second term in 2009, he announced a ‘100 day’ action plan, which became a hot topic for media discussion. He played an important role in keeping consumer inflation in control. His report (Patel Committee report) focuses on strengthening Monetary Policy framework and Exchange rates.

Sources inside the Finance Ministry say that despite all conflicts, the Prime Minister and babus are impressed with Rajan’s steps for empowering the Economy and he still leads the race to become the next RBI Governor. Recent survey by Economic Times tell that about 87% of Indians want Rajan to continue in his second term.

All the 5 contenders, apart from Rajan, are deft in their areas of work. Whoever becomes the RBI Governor will be beneficial for the country. But who will get this top post, it is time to wait and watch!

The Goods and Services Tax is one of the crucial tax reforms which the Narendra Modi led Central government wishes to introduce for the Indian Economy. Officially known as the Constitution (One Hundred and Twenty-Second Amendment) Bill 2014, it is a Value Added Tax which is planned to be implemented by April 2016.

Under this Bill, a GST Council will be established to task with optimizing tax collection for goods and services by the State and Centre. The Council will consist of the Union Finance Minister (as Chairman), the Union Minister of State in charge of revenue or Finance, and the Minister in charge of Finance or Taxation or any other, nominated by each State government. The Goods and Services Tax will subsume various Central indirect taxes, including the Central Excise Duty, Countervailing Duty, Service Tax, etc. It also subsumes State Value Added Tax (VAT), Octroi and Entry tax, Luxury tax, etc.

Let’s say a truck is moving goods from Chandigarh to Chennai. It will pass through about 8 states. During that time, it will pay a variety of taxes – Octroi, VAT, excise duties and so on. Each source of tax collection is a source of confusion, corruption and delay. By the time the truck arrives at a destination in a couple of weeks, a huge amount of cost is indirectly added to the consumer. Instead of India being a common economy, we are a patchwork of dozens of economies making growth slow, business impossible and corruption high.

This bill aims at removing those Middlemen, Babus and Police, who are used to collecting random taxes & bribes from these businesses. Many businesses are built and even thrive because of these connections. The middleman is the ultimate power in India – whether it be kiranas blocking retail reforms or blocking GST through a variety of hidden tactics, these illegal channels need to be blocked, for the economy to prosper.

This problem has been recognized by the developed economies- Sweden, Denmark, Germany, Switzerland, Japan – have moved to a common GST (Goods and Service Tax) to provide a one common window for tax collection. With just one place of collecting taxes, there won’t be much delays and corruption. When delays and corruption decreases, economy prospers. The single place for tax collection will drastically improve amount of revenues collected [since it will be much easier to verify who didn’t pay] and at the same time help businesses grow.

Further, the Centre will levy an additional one per cent tax on the supply of goods in the course of inter-state trade, which will go to the States for two years or till when the GST Council decides. The Parliament can decide on compensating States for up to a five-year period if States incur losses by implementation of GST. It is because concerns have mounted over potential losses to states due to subsuming of state levies into GST. States have raised concerns of revenue loss due to the phase out of the CST, which they have pegged at Rs 34,000 crore. On a theoretical level, *Revenue Neutral Rate (RNR)* for GST would ensure that there are no losses to either the state or the Centre. Indirect tax collections are in fact expected to go up on the back of better tax compliance under the regime. However, the Finance Minister has promised Rs 15,000 crore to states as Central Sales Tax compensation in this fiscal.

With cascading taxes gone, over a period of time the lower tax burden would translate into lower prices for goods, which is of course, dependent on what the GST rate would be. With the disruptions in Parliament in the Monsoon session, one can hope that the Bill gets passed as soon as possible, for this would be an important cog in the development of Indian Economy.

*Revenue Neutral Rate: The rate that allows the Centre and states to sustain the current revenues from tax collections and, therefore, takes within its ambit, amongst others, any tax losses because of taxes subsumed and/or phased out, grant of input tax credits as well as sharing of the tax base, i.e. taxation of goods and services. It is expected to be 26.68% (comprising of CGST of 12.77% and SGST of 13.91%)